When China first unveiled its plans to connect more than 65 countries along a modern Silk Road in 2013, the project was met with great fanfare. The Belt and Road Inititiave (BRI), as it was later renamed, was initially hailed as "the most ambitious economic and diplomatic program since the founding of the People's Republic". Beyond the pledge that it would help to turn China into a high-income economic powerhouse, Chinese officials also touted the BRI as a vehicle for transforming the country's currency into a global one.
Five years on, the renminbi hasn't made much headway as an internationally-recognised unit of account, medium of exchange or store of value — the three functions a global currency must fulfil. In fact, the majority of BRI projects are not even funded this way. Like most global transactions, the dollar dominates, putting a natural cap on just how revolutionary the BRI can be.
In recent years, Chinese officials have made a concerted effort to promote the renminbi's international use. Since 2009, China has signed more than 30 bilateral currency swap agreements with a wide range of countries from Argentina to Nigeria. This year, Chinese regulators have loosened rules for foreign commercial banks to conduct business on the mainland. And as recently as last week, they also extended more licenses to Western banks to underwrite renminbi-denominated bond sales by foreign companies.
The renminbi's most notable success came in 2016, when the IMF officially welcomed it into its elite club of global reserve currencies after years of lobbying by Chinese officials. With its inclusion in the Fund's special drawing rights (SDR) basket, the renminbi now sits alongside the dollar, euro, British pound and Japanese yen.
But despite these strides, the renminbi's international reach has not budged in recent years. By some measures, it has even declined.
In August 2015, the renminbi stood as the world's fifth most-active currency for domestic and international payments, with a 2.8 per cent share according to SWIFT. By 2016, it had slipped a slot to 1.67 per cent. As of October, it remains in sixth place, with a 1.70 per cent share. The dollar, on the other hand, has maintained its commanding share of domestic and international payments at roughly 40 per cent:
Even in China, the use of the renminbi to settle trade has declined. Today, just 13 per cent is renminbi-denominated. Three years ago, it was about double that.
And when it comes to international bond issuance, China's currency has also lost its lustre. Here's a chart from Citi's David Lubin showing the decline since 2015. Now, less than $8bn worth of renminbi-denominated bonds are issued each quarter, or roughly $30bn per year:
This poses quite a problem for the BRI. Given the renminbi's limited scope as a global currency, contractors have typically preferred dollars in exchange for their work building the roads, bridges, ports and more of the initiative. To meet this demand, China has drawn billions from its massive $3tn-plus stock of foreign reserves to shore up the coffers of its "policy banks," which then help to finance various BRI projects.
But China only has so many dollars. And without an "infinite supply," warns Citi's Lubin, the country "lacks an infinite capacity to meet its goals." What this means is that there is an imposed limit to what China can achieve with the BRI. If the renminbi was a global currency and BRI could be wholly funded in the currency, the government could technically print renminbi as it saw fit. Instead, the BRI is tethered to something Beijing does not directly control.
This "dollar constraint" as Lubin calls it, becomes a much more pronounced problem if China's current account, which measures goods and capital flowing to and from the country, shifts from a surplus to a deficit:
If China needs the rest of the world’s dollars to finance itself, that might mean it is less easy for Beijing to accumulate the dollar resources it needs to finance projects in the BRI.
As the Council on Foreign Relations' Brad Setser points out in a recent blog post, China's current account is "far closer to balance than it has historically been", due primarily to a pick-up in tourism outflows:
So, China may soon start to feel the pinch from this "dollar constraint" and have to reconsider the most ambitious of its BRI aspirations.
Other countries have begun to do the same, but for different reasons. A handful of once-willing partners have since pared down proposed BRI projects and even scrapped ongoing ones in fear that the landmark infrastructure and trade push is a debt trap. Chinese officials have expendedgreat effort in recent months to convince them otherwise.
Even President Xi Jinping himself has taken up the cause. On the heels of Malaysia calling off the construction of a China-sponsored railway project in September, Xi assured attendees at a conference honouring the BRI's five-year anniversary of the following:
The Belt and Road Initiative is an economic co-operation initiative, not a geopolitical or military alliance... It is an open and inclusive process, and not about creating exclusive circles or a China club.
Or a global currency, it would appear.